UK Residential Property
Property Investment in the United Kingdom.
UK residential property has been acquired by overseas residents for many years. Although some purchasers are acquiring apartments or houses for their own use or the use of their families, most are making these acquisitions as investments.
This guide focuses on those investors seeking investment returns and does not take into account tax issues that can arise where UK property is purchased for own use or for that of a family member.
Despite recent movements in capital values, residential property prices remain attractive in most parts of the country. As a result, the yields are appealing, and the prospects for long-term capital growth are good.
The Importance of Tax.
The appeal of property investment in the UK remains great, but tax must always be considered when looking at how to structure an investment.
The UK tax authorities take a close interest in the affairs of overseas property buyers, and deal with these matters through specialist divisions of HM Revenue & Customs (HMRC).
Investors can, unless due care is taken, make costly errors over the complex rules concerning income tax, withholding tax or even inheritance tax. More recently, the UK Government have introduced new rules that applies Capital Gains Tax to non-UK residents for the first time in respect of their UK residential property investments.
Failure to plan effectively can result in the property investor paying unnecessary tax.
Liability to Taxation.
Regardless of the tax status of the landlord, income tax is charged on the rental paid to owners of all UK property. Tax is due only upon the net profit, and most expenses incurred in managing the property are available for tax relief, provided that due care is taken and professional advice is obtained. Furthermore, interest arising on “qualifying” loans, for example, can normally be applied against rental income.
Tax relief on such loan interest may be limited and HMRC will only grant relief on interest in respect of borrowings that could have been raised from independent third parties, such as banks, on exactly the same terms. As such, if claims are not made properly, HMRC might insist that this valuable and attractive relief is restricted.
In addition to offsetting expenses, certain individuals will qualify for a UK personal allowance, which is a tax-free amount of income that can be earned before the marginal rates of income tax are applied. Personal Allowances are available for British citizens and those individuals who are nationals and residents of China and Malaysia. It does not apply to people who are nationals of Singapore or Hong Kong unless they are also a British national.
Withholding tax is another important issue. HMRC requires a managing agent (or the tenant if no agent is in place) to withhold a portion of the rental income (representing the basic tax rate) before remitting the balance to a landlord resident abroad. Such overseas landlords can, however, obtain prior HMRC agreement to receive their rental in full, without any tax retained (and paid to HMRC) by their agent. This does not mean they are completely free of UK responsibilities – please see the next paragraph!
Professional help will certainly be needed to obtain and maintain this approval. If landlords fail to keep proper records, ensure their tax returns are correctly filed and promptly pay any tax due, they will lose their right to participate in this scheme. In these circumstances, they must revert to the withholding tax procedure, which is currently applied at a rate of 20%.
Liability to Taxation continued.
Overseas residents acquiring property in the UK should also be aware of the UK inheritance tax, which arises on all assets situated here. Various exemptions and reliefs are available which the purchaser needs to consider before acquisition. The use of offshore vehicles to hold such assets may also offer certain tax advantages and we can separately advise on this.
Care will be needed as these vehicles now expose the possibility of higher Stamp Duty charges on acquisition, annual tax charges and a higher rate of Capital Gains Tax on disposal of the property. However, where a residential property is acquired by an offshore company and the property is commercially let to unrelated third parties, these provisions will not apply. Capital Gains Tax now applies to all overseas investors acquiring UK residential property.
Wills/Power of Attorney.
Those who purchase property or other assets in the UK in their own name should always consider making a UK Will, and/or appointing a UK Power of Attorney where relevant. Individuals may have made a Will outside the UK, of course, but a conflict could arise between the laws of the country in which the Will has been executed and those of the UK. A UK Will could have an impact upon liability to inheritance tax, helping to reduce exposure and as such is an essential part of financial planning. In any event, it is always advisable to draw up, or revise, an investor’s UK Will following a property acquisition, or to ensure that an appropriate Power of Attorney is in place for investors from certain countries where it could assist in expediting matters.
Investors based in countries where exchange controls are in force will, of course, need to satisfy themselves that they have complied with local regulations before transferring funds offshore. In some territories individuals join together (often a husband and wife) and use their combined allowances under the regulations to pay the deposit and set-up costs. The rest of the purchase price can be met through UK borrowings, and, structured properly, the loan interest will be allowable against tax.
Dealing with Agents.
UK law obliges these agents to deduct and pay income tax on rental income quarterly to HMRC, unless you are properly registered to receive the rental income gross (see previously and below). If no allowance has been made for expenses that can be applied against tax (especially interest payable), the amount of tax withheld will be greater than necessary.
If too much tax is paid, it should be possible, once your tax affairs for the year have been settled, to reclaim it. But this may mean considerable delay in obtaining the funds, even when all justifiable allowances are eventually taken into account.
In most cases it will benefit landlords to register with HMRC under the self-assessment scheme, so that agents do not have to withhold tax and cash flow is maximised.
But this concession available under the self-assessment scheme is not absolute. To begin with, it can only be done with the prior agreement of HMRC, and this agreement may not always be forthcoming. If not, the existing rules must continue, with the tenant or agent actually paying the tax directly over to HMRC on a regular basis. HMRC will only give their consent if the individual has a good tax record, or no previous tax exposure, and if they are certain that tax evasion is not being contemplated.
Finally, if UK managing agents are to be instructed not to withhold the tax, they will only do so once HMRC has authorised them to do so and overseas landlords must still comply with UK tax reporting obligations, such as filing annual tax returns.
HW Fisher & Company has considerable expertise in managing the tax affairs of overseas property owners. As soon as we have full details of rental income, financing costs and annual expenses, we are able to assess how much tax (if any) will be payable.
Under the self-assessment regulations, we can arrange with HMRC for your agent to pay across to the overseas landlord rentals collected by them (less associated property costs) without withholding tax. In our experience it is possible to absorb this service of establishing the overseas landlord on the scheme within our overall cost. (If any complications arose with HMRC, we would immediately notify you.)
Speed and Efficiency.
Our service for overseas property owners is designed to manage your tax affairs with the maximum efficiency, and the minimum of red tape. Once we have the information referred to at the back of this guide, we will:
- Calculate tax liabilities, taking into account all legitimate costs and expenses
- Negotiate relevant concessions with HMRC
- Agree a sum (if any) that will be withheld for payment to HMRC by managing agents
- Arrange for personal tax allowances to be claimed where available
- Review copies of all existing correspondence with HMRC
- Appeal against estimated or incorrect tax assessments
- Make applications for postponement of tax payment, if appropriate
- Agree tax on your behalf with HMRC officials
- Request repayment of surplus tax withheld and paid across to HMRC
Although we will prepare and file annual income tax computations and any relevant annual tax return on your behalf, our service is not limited to once-a-year tax filing.
Instead, our service is on going as the year progresses. We will automatically up-date your accounts on each occasion that we obtain rental statements from your managing agents, negotiating with agents over withholding tax and clarifying documents as required.
We recognise that you will wish to have these matters handled with a minimum of fuss and we realise that you will wish to be kept fully informed about the progress of your investment.
Accordingly, we will send you an annual statement, made up to 5 April each year, clearly showing:
- Rental income
- All allowable expenses
- Financing costs
We will notify you of any tax paid or to be paid and, if appropriate, whether any tax withheld can be reclaimed.
HW Fisher & Company’s considerable experience of these matters, plus our state-of-theart computer systems, mean that we are able to process information, file tax computations and report to you with speed and efficiency, and keep our fees at a modest level, ensuring value for money.
Our annual charge for this service relating to a single investment by non-UK resident individuals is currently fixed at £515 per property. In addition, since the introduction of self assessment, we now charge £180 for completion and submission of tax returns, which may be separately required by HMRC.
These rates may be reviewed from time to time as appropriate, and different terms could apply in the case of offshore company owners and larger or multiple investments. But in any case, basic costs will always be discussed and agreed in advance. Should you wish, you can instruct your managing agent to pay our fees out of rental income collected by them.
If the tax authorities raise further issues when examining your property investment, we will report to you in the first instance and advise you of the cost of any additional professional time necessarily incurred on your behalf. Similarly, if you require additional advisory services – perhaps relating to the ownership of an investment or its financing – it may be necessary to charge an additional fee.
On behalf of our offshore clients, who are also not resident in the European Union, we have successfully negotiated with HMRC that it will not be necessary to add VAT to our costs.
As is normal with all of our clients, out of pocket disbursements will be added as incurred.
About HW Fisher & Company.
We are a long-established, medium-sized firm of Chartered Accountants, comprising 30 partners and approximately 300 staff. Our experience of handling the affairs of overseas residents is second to none, and dates back to the establishment of the firm in 1933.
We maintain a tax department of some 40 people, headed by seven partners who are dedicated solely to tax affairs. As well as complete knowledge of all relevant legislation and procedures, we also have an unrivalled record of HMRC negotiations.
The Next Step.
In order to manage your affairs with the greatest efficiency and minimum time commitment on your behalf, we need to be provided with basic information from you. We also require a letter of appointment, plus your authorisation to receive a variety of additional documents from other sources. These are:
- Copies of rental agreements, statements & other relevant information from your managing agent
- Copies of assessments and other correspondence from HMRC
- Information from the provider of the loan used to purchase the property
- Appropriate copies of legal documents or agreements from your solicitors
Please complete the attached forms, and send the originals and any supporting documents requested to Alan Lester, Jamie Morrison, Navin Thaker or Richard Watson at HW Fisher & Company, retaining copies for your own records.
Upon receipt, we will acknowledge your appointment of HW Fisher & Company, setting out the services to be performed in a letter of engagement. We will then immediately put in hand all matters described in this leaflet.
And in the Future.
From time to time, the UK Government considers its rules for domicile and residence, especially relating to onshore or offshore people who enjoy the benefits of the current tax regime. There remains a widespread belief that UK regulations should be brought into line with those that prevail in other countries and in that regard there has recently been the introduction of Capital Gains Tax for non-UK based owners disposing of their UK residential property. However, regulators will not wish to discourage the flow of funds introduced by offshore landlords, and the consequent benefits to the economy. In addition, Government is aware of the benefits the overseas business community, especially those who are based in London, bring to the country.
Moreover, even if no further legal revisions do take place, residence and domicile are complex subjects, and proper professional advice should always be sought and regularly reviewed. If your own circumstances are likely to change in relation to the United Kingdom, it is imperative that you consult your UK tax adviser as early as possible to ensure that the most appropriate strategy is developed.
Please note that this leaflet is based upon UK tax regulations as of Spring 2016. However, information provided is not necessarily comprehensive and does not purport to give professional advice. Further details can be obtained from the firm.
For Further Information.
If you would like additional details on our activities for overseas landlords, or any of the other services the firm provides, please contact:
HW Fisher & Company
11 – 15 William Road
London NW1 3ER
T +44 (0)20 7380 4979
T +44 (0)1923698 363
T +44 (0)20 7874 7983
T +44 (0)20 7874 7958
Please note that this leaflet is based upon UK tax regulations as of Spring 2015. However, information provided is not necessarily comprehensive and does not purport to give professional advice. Further details can be obtained from the firm.
The PDF version of this form contains additional forms which can be used to make requests relating to UK residential property: